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15 November 2016 During FY16, Ceres Power has made substantial progress towards
achieving its aim of developing a next-generation fuel cell technology that
will be cost-competitive with conventional power generation techniques.
Recent enhancements to the technology have extended the range of
applications where it may be deployed, resulting in the announcement of a
succession of partnerships with blue-chips Cummins, Honda and Nissan.
Year end
Revenue (£m)
EBITDA (£m)
PBT* (£m)
EPS (p)
DPS (p)
P/E (x)
06/15 0.3 (9.7) (10.5) (1.2) 0.0 N/A
06/16 1.1 (10.5) (11.6) (1.2) 0.0 N/A
06/17e 2.2 (10.3) (11.3) (1.0) 0.0 N/A
06/18e 3.0 (9.5) (10.5) (0.9) 0.0 N/A
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Technology advances underpin engagement
Adoption of fuel cells generally remains limited because although the basic
technology is proven, it is not yet cost competitive. Ceres’ patented Steel Cell
technology is an innovative solution to this cost problem. It uses non-exotic
materials that can be processed in volumes using conventional manufacturing
equipment and techniques, thus bringing down costs and enabling widespread
adoption. Recent enhancements to the technology give it the electrical efficiencies,
start-up times and robustness required to be viable for deployment in commercial
premises, data centres and electric vehicle range extenders as well as residential
applications. In addition, Ceres’ high-speed print line has achieved a tenfold
reduction in processing times, a key step in realising low-cost, high-volume
production capability.
Customer engagement intensified during FY16
Ceres’ business model is to focus on developing highly efficient, robust and cost-
effective fuel cell stacks that will be deployed by brand leaders in their own power
generation systems. Over the last year, Ceres has announced significant customer
agreements with British Gas, Cummins, Honda and Nissan. We raise our FY17
revenue estimate and reduce losses to reflect increasing levels of customer
engagement and introduce FY18 estimates. Cash consumption during FY16
totalled £11.3m, leaving £6.9m at end June 2016. In September Ceres raised
£19.4m (net), through a placing at 8.75p/share, to take it through to the onset of
commercial launches, which management targets for end calendar 2018.
Valuation: Long-term value from royalties
The long-term value for Ceres lies in potential royalty streams created when energy
generation systems incorporating Steel Cell technology are commercialised.
Management estimates that the entry into new markets achieved during FY16
means that the total value of potential royalty revenues has trebled from c £400m to
c £1,200m.
Ceres Power Holdings FY16 review
A fuel cell in every home and business
Price 9.63p
Market cap £97m
Net cash (£m) at end June 2016 (including short-term investments but excluding £19.4m raised from placing)
6.9
Shares in issue 1,006.5m
Free float 43.6%
Code CWR
Primary exchange AIM
Secondary exchange N/A
Share price performance
% 1m 3m 12m
Abs (8.3) 11.9 51.0
Rel (local) (5.0) 14.6 38.2
52-week high/low 10.6p 4.3p
Business description
Ceres Power is a developer of low-cost, next-
generation fuel cell technology for use in
decentralised energy products that reduce
operating costs, lower CO2 emissions, increase
efficiency and improve energy security.
Next events
AGM 8 December 2016
Analysts
Anne Margaret Crow +44 (0)20 3077 5700
Roger Johnston +44 (0)20 3077 5722
Edison profile page
Alternative energy
Ceres Power Holdings is a
research client of Edison
Investment Research Limited
Ceres Power Holdings | 15 November 2016 2
Investment summary: Making fuel cells affordable
Company description: Low-cost, robust fuel cell technology
Ceres’ patented Steel Cell technology for fuel cells operates on mains natural gas, is robust and
offers high energy conversion efficiency. Importantly it is manufactured using standard processes
and conventional materials such as ferritic steel, which means it can be mass produced at an
affordable price for domestic and business use. Following the adoption of a new business model in
2013, Ceres now focuses on the fuel cells and stacks that selected partners integrate into their
power generation systems, enabling it to access multiple geographies under the aegis of well-
recognised brands. Ceres is currently working with industry partners to develop Steel Cell based
power generation systems for a wide range of applications, including residential properties, data
centres and other sites requiring back-up power, commercial premises and automotive range
extenders. Ceres continues to improve electrical conversion efficiency, power density, stack lifetime
and manufacturing techniques so that systems incorporating the Steel Cell technology will become
cost-competitive with conventional technology without recourse to subsidies.
Financials: Placing supports next phase of commercialisation
Our financial model assumes a ramp-up in revenues as existing customers mature from initial
technology evaluations to joint development programmes and additional customers engage in
technology evaluations. Management’s goal is to secure five global engineering companies as
customers in joint development agreements by the end of 2017, with the intention of being in two
commercial launch programmes by the end of 2018. The goal is for established customers to pay
an upfront licence fee and royalties once their products incorporating the Steel Cell technology are
commercialised. We exclude any potential licence and royalty fees from our financial model, giving
substantial upside to our estimates. The net £19.4m proceeds from the September placing will put
Ceres in a strong financial position to progress these commercial opportunities. It will help to fund
the further development of the 1kW and multi-kW modular platforms and maintain its leadership
position in solid oxide fuel cells (SOFCs) by continuously improving the performance and maturity
of its Steel Cell technology. The funding also supports the advancement of the manufacturing
readiness levels to enable future scale up with appropriate manufacturing partners.
Valuation: Long-term value from royalties
Ceres has yet to generate meaningful commercial revenues, so its value resides in the potential
royalty streams generated once distributed power systems incorporating Steel Cell technology are
eventually commercialised. Our analysis has been expanded from our initiation note, which only
covered the residential market, to include the data-centre and back-up power segment, commercial
segment and vehicle range extenders. This increases the size of Ceres’ royalty opportunity, based
on management’s estimates of potential market penetration, from £400m to £1,195m.
Sensitivities: Dependent on partners
There is still development required to take the 1kW platform for residential applications from
prototype to commercial readiness and to develop the 5kW modular platform at stack and system
level for higher power applications. The strategy of working with partners to develop complete
systems means that Ceres is reliant on those partners taking product to market. Adoption of fuel-
cell technology is being driven by legislation to reduce airborne pollutants and subsidies. We note
that the Steel Cell technology is intended to give a cost-effective alternative to conventional modes
of power generation without recourse to subsidies.
Ceres Power Holdings | 15 November 2016 3
Company description: Affordable fuel cell technology
Ceres Power was established in 2001 to acquire fuel cell intellectual property rights developed over
the preceding decade by Imperial College, London. It was admitted to AIM in 2004.
The original research programme was aimed at determining whether it was possible to create a fuel
cell from low-cost materials. From this IP, Ceres has developed its patented Steel Cell technology
for producing third-generation SOFCs. The Steel Cell technology is more efficient, significantly
lower cost and more robust than other SOFC technology and competing fuel cell technologies.
Recent efficiency enhancements mean that the technology is potentially applicable not only to the
residential sector, as previously, but also to the commercial sector, data centres and electric vehicle
range extenders. Management is engaging with major OEMs that will potentially integrate the Steel
Cell technology into their own products. These include British Gas (in conjunction with OEMs),
Cummins Power Generation in the US, Honda, Korea-based KD Navien, and Nissan.
Ceres is headquartered in Horsham, England, with an office in Kyoto, Japan. It employs over 100
people. The Horsham facility houses production and test equipment capable of manufacturing fuel
cells and stacks in the volumes required to support customer evaluations and development
programmes. Ceres may partner with third parties to provide the higher volumes required as
customers transition to the commercial phase.
Fuel cell market: Part of the distributed energy future
Market drivers
Power generation is shifting from a centralised to a distributed model in which fuel cell-based
generation systems play a key role. There are several drivers behind this: efficiency, energy
security and economics.
Energy conversion efficiency – distributed systems are a more efficient way of converting the
energy in natural gas to electricity:
SOFCs are inherently more efficient at converting natural gas to electricity than even advanced
natural gas-combined cycle (NGCC) plants (Exhibit 1).
In centralised power generation systems such as NGCC plants, around 8% of the initial energy
content in the gas is dissipated as the electricity is distributed over the grid to household or
business premises.
If the SOFC is integrated into a combined heat and power system (CHP), the heat energy
produced as a by-product of the energy conversion process is used to heat up water for
washing or central heating, so the total amount of energy converted to useful power is 80-95%.
Security of energy supply – distributed systems reduce dependence on the electricity grid. This is
important both in developed countries such as the UK and the US where the infrastructure is ageing
and in developing economies where demand is growing faster than supply, causing prolonged
blackouts. In South Korea, safeguarding the energy security of individual neighbourhoods is
important because the government is concerned about the belligerent intentions of its northern
neighbour. The Korean government is heavily subsidising fuel cell deployment to reach its target of
obtaining 11% of the nation’s primary energy supply from “new” (which includes fuel cells) and
renewable sources by 2035, while at the same time creating an indigenous fuel cell industry worth
US$98bn and employing 175,000 people by 2040.
Reducing investment required in power generation infrastructure – substantial programmes of
investment are required globally to meet increasing energy demands or replace ageing
infrastructure. It is less expensive and risky for utilities to invest in distributed power generation
Ceres Power Holdings | 15 November 2016 4
systems than large centralised units because the smaller distributed systems may be deployed
incrementally in line with rising demand, rather than building a large power station in anticipation of
a forecast increase in demand and then running this inefficiently while demand rises to meet
capacity. A study carried out by the Department of Energy’s Pacific Northwest National Laboratory
published in December 2014 noted that total electricity generation capacity in the US would need to
increase by 68GW between 2013 and 2022. This capacity gap is exacerbated by the retirement of
coal-fired generation facilities taking out 59-77GW of capacity by 2022. The study concluded that
distributed generation based on SOFC technology could play a role in meeting this demand cost-
effectively and more quickly than constructing advanced natural gas-combined cycle plants and
with less risk to the investor, as capacity may be added as required. The cost effectiveness
depends on being able to construct SOFCs with an extended stack life and in high volumes, which
is what Ceres’ Steel Cell technology is designed to do.
Exhibit 1: Comparison of costs and benefits of central grid production with distributed generation
HHV efficiency
CO2 emissions
(g/kWh)
NOx emissions (mg/kWh)
SOx emissions (mg/kWh)
Capital cost ($/kW)
Levelised cost
of electricity (c/kWh)
Fuel cost ($/mmbtu)
Additional benefit
of distributed generation
(c/kWh)
1,000MW vintage coal 32% 1,080 3,400 29,000 - 3.8 2.34 -
1,300MW pulverised coal with carbon capture and storage
28% 112 327 109 4,600 13.9 2.34 -
400MW advanced natural gas combined cycle
53% 341 22 3 1,000 6.5 4.5 -
270kW natural gas solid oxide fuel cell
56% 289 <33 0 672 8.2 5.2
8.69* 4.5**
6.18
Source: Pacific Northwest National Laboratory, December 2014. Note: *Gas at retail prices. **Gas at wholesale prices.
Market statistics
Annual sales of fuel cells for stationary power generation applications, the segment in which Ceres
is primarily based, rose from 147.8MW in 2014 to an estimated 203.2MW in 2015 (source: e4tech:
The Fuel Cell Industry Review 2015). However, the amount of power generated from fuel cells
remains small in comparison with total generation capacity. In 2015 total electricity capacity in the
US was 1,040.8GW, of which fuel cells contributed only 0.1GW (source: Annual Energy Outlook
2016, US Energy Administration). Uptake continues to be held back by the relatively high cost of
fuel cell technology. This currently restricts adoption to situations where either the availability of
subsidies or the financial cost of being without power, as in the situation for data centres, changes
the economics in favour of fuel cell deployment. Reducing the cost of fuel cells through adopting
Ceres’ potentially lower-cost technology would accelerate deployment. We review the drivers within
each of the segments in which Ceres is involved in the section on customer engagement.
Strengthening customer engagement
Business model
Ceres’ strategy is to form partnerships with industry leaders that will develop and sell complete
product, with Ceres licensing the core fuel cell technology. This enables Ceres to access multiple
geographies under the aegis of well-recognised brands, potentially accelerating product adoption.
When partnering with companies with an established presence in a sector, eg Honda, Ceres would
supply cells or stacks, which the partner would then integrate into their systems. When partnering
with new market entrants, eg KD Navien, Ceres will supply complete power generation systems
based on Steel Cell technology to help its partner evaluate the technology. However, the intention in
the longer term is for these partners to use the prototype system designed by Ceres as a blueprint
for developing their own variants, which they, not Ceres, will manufacture. Management aims to
Ceres Power Holdings | 15 November 2016 5
have five global engineering companies as customers in joint development agreements by the end
of 2017 in order to achieve traction in multiple markets in the major regions across the world, with
the intention of being in two commercial launch programmes by the end of 2018. The relationships
with Honda, Nissan and Cummins show that it is well on the path to achieving this.
The enhancements to the Steel Cell technology that have been made over the last year (discussed
on page 7) have enabled Ceres to broaden the range of applications for which the technology is
suitable. Initially the technology was targeted only at the relatively low power residential CHP
sector, where energy utilisation levels were boosted by capturing the heat released during electricity
generation. Advances in electrical efficiency have enabled Ceres to attract partners with which it is
developing Steel Cell based power generation systems for residential power only, commercial and
data-centre deployments. These technical advances also improve the competitiveness of the
technology compared with conventional power generation, accelerating deployment. Reductions in
start-up time, combined with the ability to maintain efficiency through an increased number of power
cycles, have enabled Ceres to attract partners in the automotive and back-up genset markets. We
review drivers and Ceres’ position within each of these segments in turn.
Residential: Micro-CHP improves economics for householders
Japan – JDA with Honda
Japan is the most advanced country with regards to residential CHP initiatives as it is heavily
dependent on imported gas to meet its energy requirements. Since 2009 the government has
supported the ENE-FARM programme, which encourages the adoption of CHP fuel cells for
domestic installation through the provision of subsidies. An estimated 40-50k units were shipped for
the programme during 2015, the largest annual deployment to date. The majority of these were
proton exchange membrane (PEM) fuel cells from Panasonic and Toshiba, the remainder SOFC
from Aisin Toyota. The government goal is for 1.4m residential ENE-FARM units to be operating by
2020, 5.3m by 2030, around one tenth of all Japanese households, which is a big step up from
current levels. Subsidies under the programme were extended into 2016, but at lower levels than
previously. We understand that Ceres is addressing this segment through its JDA with Honda.
Following a year-long evaluation of the Steel Cell technology, which concentrated on performance,
robustness and ability to handle repeated power cycles, in October 2014 Ceres signed a JDA with
Honda to jointly develop a fuel cell stack using the Steel Cell technology suitable for deployment in
1-5kW systems. The results from the first phase met performance targets, leading to the signature
of a follow-on JDA agreement in January 2016. Ceres has developed a prototype CHP system that
is smaller than any currently deployed in Japan and the only one able to meet the space constraints
of a typical urban dwelling in the country. The system is also suitable for deployment in other
situations where space is at a premium.
Europe – programme with British Gas
The European Commission is engaged in a smaller scale microCHP project: ene.field. This project,
which ends in late 2017, targets the deployment of 1,000 proton exchange membrane fuel cell
(PEMFC) and SOFC micro-CHP units. European boiler manufacturers have teamed up with
suppliers of fuel cell technologies to develop systems for the project. For example German boiler
giant Viessmann acquired Hexis for its SOFC technology and is partnering with Panasonic for
PEMFC technology. Bosch is using SOFC technology from Aisin Seiki and BDR Thermea with
Toshiba. During calendar Q416, Ceres will deliver 10 prototype home power systems to British Gas
for deployment in homes and at British Gas sites. These will be used in the final phase of the EU
ene.field fuel cell residential programme. The trial will confirm that the new systems, which run with
existing heating, reduce the energy consumption and carbon emissions of a typical home by up to
one-third and help quantify the potential cost savings. The trial will also prove that Ceres’ Steel Cell
Ceres Power Holdings | 15 November 2016 6
technology is ready for commercial deployment and demonstrate that the technology can be
integrated into cost-effective solutions for the European market, thus encouraging OEMs to develop
domestic power systems tailored for the UK/European market that incorporate Ceres’ fuel cells and
stacks. These OEMs will be able to adapt Ceres’ prototype design, thus accelerating their time to
market. Since these Steel Cell-based systems will be able to run on bio-gas as well as natural gas,
their deployment will give British Gas a route to a decarbonised, distributed power generation
solution. The availability of this solution should help the UK government achieve the dual goal of
reducing carbon emissions and replacing old, centralised power generation systems without
incurring the significant expenditure and risk associated with nuclear options.
Korea – engagement with KD Navien
As in Japan, the government in South Korea is actively promoting the adoption of fuel cell
technology in order to reduce dependence on imported fuel. Deployment to date has primarily been
for utility-scale projects using systems from Doosan or POSCO (which license fuel cell technology
from US-based FuelCell Energy). However, there are 140 1kW residential units at the Hydrogen
Town demonstration site in Ulsan, which shows interest in fuel cells for this application. KD Navien,
Korea’s largest boiler maker, intends to address both the domestic and the international micro-CHP
sector in partnership with Ceres Power. Ceres shipped a fuel cell power system to KD Navien,
which successfully demonstrated superior performance for cycling and robustness compared to
similar SOFC technologies. Ceres and KD Navien continue to discuss the next phase of the
development programme.
Expanding residential market into non-CHP systems
Advances to the Steel Cell technology announced in December 2015, which are incorporated in the
V3 Steel Cell, delivered Ceres’ stated target of over 50% net electrical efficiency. This enables the
creation of fuel cell power systems for residential use that are more efficient than the best
centralised generating plant when operated in power only mode (as well as achieving overall
efficiency of up to 90% when operated in CHP mode).
Data centres: Programme with Cummins
Banks, telecommunications network operators, hospitals, educational and penal establishments
and wastewater treatment sites are increasingly deploying fuel cells as primary or back-up power.
For these applications the economic cost of not having power, estimated by the Lawrence Berkeley
National Laboratory in 2009 at $14.4-173.1/kWh for medium and large commercial and industrial
facilities in the US, is more significant than the comparative cost of electricity from fuel cells. The
comparative cost is currently higher than that from conventional sources, but will potentially be less
if Ceres is successful in taking its technology through to mass adoption. Alternative back-up
systems depend on batteries, which are expensive and discharge over time, or diesel generators,
which emit pollutants and are noisy, making them unsuitable for use in an urban environment.
Currently Bloom Energy and Doosan are the dominant providers of high-power systems for data
centres. Advances in electrical conversion efficiency mean that Ceres is now able to address these
sectors. In August 2016 it announced that it was working with Cummins Inc. on a programme for
the US Department of Energy (DOE) to develop a demonstration 5kW SOFC system with a target
60% electrical efficiency. It has already demonstrated 56% efficiency in initial tests of a multi-kW
system. Management estimates that, if successful, the Steel Cell-based system would enable data
centre operators to cut overall costs by over 20% and carbon footprint by <49%. This programme
represents Ceres’ first engagement in the US.
Ceres Power Holdings | 15 November 2016 7
Motive: Programme with Nissan
The key driver for the adoption of fuel cells in vehicles is the introduction of regulations reducing
carbon emissions and particulate emissions from vehicles. Car manufacturers are introducing a
variety of electric vehicles: fuel cell vehicles, plug-in hybrids (battery-powered electric motor plus
internal combustion engine) and battery-powered vehicles. Battery-powered vehicles are more
suitable for smaller cars and shorter trips because of the limited driving range (currently 100-200km
for a medium-sized vehicle), while fuel cell electric vehicles offer comparable range (around 600km)
to internal combustion engine vehicles and are the lowest carbon solution for medium and larger
cars and longer trips. A battery-powered vehicle currently requires six to 12 hours connected to the
grid for a recharge with standard charging equipment. Even rapid charging equipment takes half an
hour to charge a vehicle so a public electrical charging point would need to be several times larger
than a conventional petrol station to be able to refuel the same number of vehicles per day. By
contrast, a fuel cell-powered vehicle can be refuelled in a similar time to a petrol vehicle.
Four things are needed for fuel cell-powered vehicles to be widely adopted:
Vehicles need to be available commercially. This has happened. For example, both the
Hyundai Tucson and the Toyota Mirai are available from dealers in California.
Hydrogen refuelling stations needs to become widely available (for adoption of PEM fuel cell-
powered vehicles). Infrastructure roll-out has commenced but is not extensive. For example
ITM Power does not expect to reach 11 refuelling stations in the UK until the end of 2018, and
roll-out of vehicles in California is restricted to drivers within easy reach of refuelling stations.
The cost of fuel cell electric vehicles needs to reduce. According to Green Car Reports, the
Toyota Mirai is priced at $57,500 in the US (before any subsidy).
Fuel cell technology must not be rendered obsolete by advances in battery technology that
enable manufacture of battery-powered vehicles with adequate range at a price sufficiently low
for volume adoption. The production of suitable batteries still appears to be several years away.
Management notes that if a significant number of new cars were to be battery powered electric
vehicles, the existing electricity grid would not be able to deliver the power required.
Paradoxically, homes and businesses may then need to deploy fuel cells running off mains-
delivered natural gas to provide the additional electricity required.
While Ballard Power Systems, Plug Power, Hyster-Yale (which acquired Nuvera in December
2014), Intelligent Energy and Horizon Fuel Cell Technologies are involved in the sector, the first
three only work with heavy vehicles where high power density is not so important. Intelligent Energy
has mothballed its liquid cooled technology for larger vehicles and is concentrating on air-cooled
technology suitable for primary power of motor scooters and range extenders of larger vehicles.
Horizon focuses on range extenders for lightweight electric vehicles.
In March 2016 Ceres Power announced it was leading a UK government-backed consortium,
including Nissan, to trial its Steel Cells with a view to extending the range of electric light
commercial vehicles. Nissan is opting for SOFC rather than the PEM technology adopted by other
automotive companies, as SOFC already works with natural gas rather than pure hydrogen, so
should be more readily adapted for use with bio-ethanol. Bio-ethanol fuels such as those sourced
from sugarcane and corn are widely available in countries in North and South America and Asia,
supporting adoption of fuel cell vehicles in these regions without needing a hydrogen distribution
infrastructure, as well as delivering a carbon-neutral solution. Ceres’ Steel Cell architecture is one
of a small handful of SOFC technologies robust enough to withstand the thousands of power cycles
demanded by an automotive application and able to start from cold and reach full power in less
than 15 minutes.
Ceres Power Holdings | 15 November 2016 8
Commercial applications: Agreement with unnamed global OEM
As a result of the advances in system efficiency, which position the technology for deployment in
higher power applications, in February 2016 Ceres announced that it had signed an evaluation
agreement with a new potential customer who is a leading global OEM. Ceres has commissioned a
complete Steel Cell system for a period of rigorous testing at the customer’s site. Under the terms
of an additional memorandum of understanding, if this testing proves successful, the two parties
intend to enter into joint development of a multi kilowatt system later in calendar 2016. In addition,
the system being developed under the DOE programme with Cummins will be modular and
scalable for multiple distributed power applications up to 100kW. This should make it suitable for
deployment in numerous commercial and industrial applications.
Technology developments
Efficiency enhancements open up new sectors
The V3 Steel Cell technology platform, announced in December 2015, improved efficiency and
power density to the point at which Ceres was able to address a broader range of applications, as
discussed above, as well as significantly improving the economic case for the CHP residential
market. V4, released in calendar Q316, was primarily intended to focus on reduced manufacturing
costs (discussed below), but this iteration of the technology also exhibits improved power density,
and can start from cold and reach full power in less than 15 minutes, which management believes
is a world first for solid oxide fuel cells. This iteration exhibits increased lifetime, having been cycled
through thousands of warm-ups and cool-downs. The reduced start-up times and longer lifetime
have enabled Ceres to further expand its addressable market, as discussed.
Manufacturing advances reduce costs
During FY16, significant progress was made on production scale-up projects intended to provide
demonstration and validation of a production process suitable for high-volume fuel cell manufacture
at market cost points. The key innovation is based on changing the way in which the thin ceramic
layers forming the electrolyte layer inside individual cells are laid down. Originally this was done by
spraying. In February 2016 Ceres commissioned its high-speed print line, which is used to deposit
the thin ceramic layers. The new print line reduced print cycle time from 30 seconds to three,
substantially improving throughput. The technique also gives a better-quality deposition layer.
V4 of the Steel Cell incorporates these and other manufacturing enhancements, removing over
20% of the processing steps and improving material utilisation. Combining these manufacturing
gains with the greater power density achieved in this release gives better cost-effectiveness, thus
improving the competitiveness of the technology and potentially accelerating adoption. Ceres
currently has the capacity to manufacture 30,000 Steel Cells each year. In the longer term, Ceres is
likely to partner with third parties that will manufacture fuel cells in volume using Ceres’ proprietary
process.
Ceres Power Holdings | 15 November 2016 9
Technology: Innovative solid oxide fuel cell technology
Exhibit 2: Ceres’ Steel Cell structure
Source: Ceres Power
Fuel cells bring about a controlled reaction between hydrogen and oxygen to form water, electrical
energy and heat energy. Since hydrogen and oxygen do not spontaneously react, the electro-
chemical reaction is effected either by bringing them together in the presence of an expensive
catalyst such as platinum or heating the gases to a high temperature. PEMFCs are the most widely
deployed at present because this is a mature technology that operates at relatively low
temperatures. The drawback is that the technology relies on platinum, pushing up costs. SOFC,
which is Ceres’ technology, is gaining in popularity because it offers potentially higher levels of
electrical efficiency and does not require a costly platinum catalyst (see Exhibit 3). However,
SOFCs depend on high temperatures to get the reaction going. The higher the temperature, the
more exotic and more expensive the fuel cell materials become. The evolution of SOFC cells, which
is discussed later, can be viewed as a quest to find electrolyte materials and structures that operate
at lower temperatures, enabling the entire fuel cell to be made from less expensive materials.
The other drawback with PEM systems is that they typically run off pure hydrogen gas, which is not
readily available. This significantly limits deployment to regions where there is an established
infrastructure for distributing hydrogen. As discussed, it currently restricts roll-out of fuel cell-
powered vehicles to parts of the western and eastern seaboards of the US and a few areas in
Europe, Japan and Korea. PEM systems can be adapted to run off natural gas, which is readily
available through national grid networks, but only by adding a complex external reformer to the fuel
cell system that adds significant cost to the completed product. SOFC systems typically run off
natural gas, using a simpler, less expensive type of external reformer.
Crucially for applications in the domestic or commercial environment, SOFC exhaust streams are
sufficiently hot to heat water for washing purposes or for space heating in a CHP system. This
raises the overall energy conversion of the system from over 40% to between 80% and 95%. The
additional efficiency offered by using the heat generated improves the total cost-effectiveness
compared with conventional techniques for power generation.
Ceres Power Holdings | 15 November 2016 10
Exhibit 3: Comparison of fuel cell types
Fuel cell type 000s of units shipped*
MW shipped*
Platinum catalyst
Operating temperature
Electrical efficiency
Applications Companies
Proton exchange membrane fuel cell (PEMFC)
63.8 179.6 80°C 40-60% hydrogen fuel, c 35% natural
gas
Transport, portable, stationary residential and commercial/industrial
Ballard, Doosan, EPS, Heliocentris, Hydrogenics, Intelligent Energy, Hyster-Yale, ITM Power, Plug Power
Solid oxide fuel cell (SOFC)
5.4 63.1 550-1,000°C 45-60% Stationary utilities, commercial/industrial and residential, auxiliary power units, portable military
Aisin Seiki, Bloom, Ceres Power, Dominovas Energy, FuelCell Energy, GE, Hexis, SOLIDPower (also see Exhibit 4)
Direct methanol fuel cell (DMFC)
2.2 0.2 50-120°C <40% Portable consumer/military, auxiliary power units
SFC Energy
Alkaline fuel cell (AFC)
0.0 0.2 90-100°C 60-70% Stationary industrial AFC Energy
Phosphoric acid fuel cell (PAFC)
0.1** 24.0 100-250°C 36-42% Stationary utilities, commercial/industrial, auxiliary power units
Doosan
Molten carbonate fuel cell (MCFC)
0.1** 75.6 600-700°C 50-60% Stationary utilities, commercial/industrial
FuelCell Energy
Source: E4tech, Fuel Cells 2000, LG Fuel Cell Systems, Edison Investment Research. Note: *2015 estimates; **PAFC and MCFC systems are very high-output power, so small numbers of units shipped equate to high generation capacities.
Evolution of the Steel Cell SOFC
We noted earlier that the evolution of SOFCs represents a quest to find electrolyte materials and
structures that operate at lower temperatures, enabling the entire fuel cell to be made out of less
expensive materials. The first generation, developed in the 1980s and 1990s, uses a thick layer of
yttrium-stabilised zirconia as the electrolyte (see Exhibit 2), which also serves as the support for the
entire cell. The electrolyte needs to be heated up to almost 1,000°C to become sufficiently
conductive, so the rest of the components must be made from expensive and exotic ceramic
materials to withstand the high temperature. As they are made entirely from ceramic materials, the
fuel cell stacks are delicate and liable to crack when exposed to thermal stress when turned on and
off. Second-generation cells have much thinner electrolyte layers. This allows the cell to operate at
lower temperatures (650-850°C), so that the interconnect can be made from high-quality steel
rather than exotic ceramics, substantially reducing cost. However, there are still issues with
robustness because the anode (see Exhibit 2) has to be made thicker to give mechanical support to
the cell and is prone to cracking.
Exhibit 4: SOFC evolution
First generation Second generation Third generation
Electrolyte-supported cells Anode-supported cells Metal-supported cells
Operating temperature 900-1,000°C 650-850°C 550°C
Maturity of technology
Fuel cell stack cost
System cost
Robustness
Companies Bloom, Fraunhofer (Vaillant), Siemens, Staxera, Westinghouse
Acumentrics, Delphi, Hexis (Viessmann), Kyocera/Aisin Seiki (Bosch, JX Nippon, Toyota), LG, Solid Power (Danfoss), Sumitomo, Versa (FuelCell Energy)
Ceres Power Steel Cell technology, GE, Redox Power Systems
Source: Ceres Power, Edison Investment Research. Note: = OK; = good; = excellent.
Ceres Power addresses the problems of cost, robustness and performance by using a thin layer of
cerium oxide doped with gadolinium as the electrolyte. This material is conductive at 550°C, so it
can be used in conjunction with ferritic stainless steel. This is a relatively inexpensive and readily
available metal that is commonly used for car exhausts. As it is widely used in the automotive
industry, it can be turned into different shapes using conventional manufacturing techniques. A
sandwich of thin layers of ceramic metal mixture (anode), ceria (electrolyte) and conducting ceramic
(cathode) is deposited on a thin steel plate to make a single cell (see Exhibit 2). The steel acts as a
support, so the anode can be made thin enough to reduce cracking. The manufacturing process is
Ceres Power Holdings | 15 November 2016 11
inherently simpler, less expensive and suitable for high-volume production since it uses printing
techniques developed for high-volume production of photovoltaic cells. The technology is protected
by 47 patent families, which cover core technology areas including anode and electrolyte materials
and structure, Steel Cell design, certain manufacturing techniques such as the use of lasers to
perforate the steel interconnect with thousands of tiny holes to admit the reactant gases, and stack
and system design and operation.
Market consolidation and new entrants
The fuel cell market is dynamic, with global majors taking strategic positions in the sector. Ceramic
Fuel Cells went into voluntary liquidation in March 2015 and the assets, some employees and
licence for the IP acquired by SOLIDPower (formerly SOFC Power) in August 2015. In June 2015
Ballard acquired Protonex. In July 2015 Plug Power acquired the outstanding stake in its HyPulsion
joint venture that it did not already own. During 2015 German boiler manufacturer Veissman
acquired the remaining 50% stake in Hexis that it did not already own. New entrants are being
attracted to the market. In July 2015 Swiss Hydrogen was spun out of the Swatch Group. Electro
Power Systems floated on Euronext in April 2015, raising over €14m.
Sensitivities: Affordability is key to market adoption
Technology risk: Ceres has demonstrated that its Steel Cell technology is sufficiently efficient to
be viable in power-only residential and commercial deployment. There is still development required
to take the 1kW platform for residential applications from prototype to commercial readiness and
develop the 5kW modular platform at stack and system level for higher power applications.
Government subsidies: At present most fuel cell activity, whether in Asia, North America or
Europe, is supported by government subsidies. These are intended to encourage customer
adoption and research in technology and manufacturing techniques to create volume production at
competitive prices without the need for further subsidy. The subsidies will not remain in place
indefinitely and may be removed if economic conditions weaken, so standalone economic viability
must be proven. Management notes that Ceres’ Steel Cell technology should not require subsidies
when manufactured in volume.
Legislation: Adoption of fuel cell technology in Europe, North America and China is being driven by
legislation to reduce greenhouse gases and other airborne pollutants. Abandonment of these
policies, which seems unlikely, would have an adverse effect on adoption. We note that this
legislation presents a threat to manufacturers of diesel-fuelled power generation systems, hence
the interest in the Steel Cell technology from major companies operating in this sector.
Reliance on channel partners: The strategy of working with partners to develop complete
systems means that Ceres is dependent on those partners taking product to market.
Valuation
Ceres has yet to generate commercial revenues, so its value resides in the potential royalty
streams generated once distributed power systems incorporating Steel Cell technology are
eventually commercialised. In Exhibit 5 we present our scenario analysis, which explores potential
royalty revenues and profit generated in each of the key markets as commercial partners take
significant share in their respective markets. This analysis is similar in approach to that adopted in
previous notes, but refers to a larger set of market segments as technology advances over the last
year have broadened the potential application areas.
Ceres Power Holdings | 15 November 2016 12
Exhibit 5: Scenario analysis showing potential profits attributable to key markets
Global residential market
Total number of domestic boilers and gas water heaters sold annually excluding China and Iran: 17.4m units (source: BSRIA)
Average selling price per unit: $3,555. Royalty rate: 4.0%.
Market share for products with Steel Cell technology 2% 5% 10% 15% 20%
Royalty revenues £40.0m £100.0m £200.0m £300.0m £400.0m
Annual profit after tax £15.4m £39.2m £78.5m £119.2m £157.0m
Global data centre/back-up market
Total annual market size: 140GW (source: Navigant Research)
Average selling price per kW: $2,000 (source: management). Royalty rate: 4.4%.
Market share for products with Steel Cell technology 0.3% 0.5% 1.0% 1.5% 2.0%
Royalty revenues £30.0m £50.0m £100.0m £150.0m £200.0m
Annual profit after tax £10.8m £18.8m £39.2m £59.2m £79.9m
Global commercial market
Total annual market size: 20GW (source: BSRIA)
Average selling price per kW: $2,000. Royalty rate: 6.1%.
Market share for products with Steel Cell technology 2% 7.5% 10% 15% 20%
Royalty revenues £39.5m £148.1m £197.4m £296.1m £394.8m
Annual profit after tax £15.1m £58.4m £77.5m £117.6m £157.2m
Global range extender market
Total annual market size: 7.9GW (new trucks only, not retrofit) (source: Heavy Duty Manufacturers Association)
Average selling price per kW: $2,000. Royalty rate: 7.9%.
Market share for products with Steel Cell technology 2.5% 5% 10% 15% 20%
Royalty revenues £25.0m £50.0m £100.0m £150.0m £200.0m
Annual profit after tax £8.6m £19.9m £39.8m £59.2m £79.9m
Source: Edison Investment Research, BSRIA, Heavy Duty Manufacturers Association, management, Navigant Research. Note: $1.2/£.
Although it is likely that Ceres will adopt a business model in which some of the potential royalties
related to single customer engagement are paid upfront as a one-off licence fee, with the payment
offset against lower royalty rates, for simplicity our analysis assumes royalty revenues but no
upfront licence fees. We apply a higher royalty rate for those segments where legislation relating to
emissions from power generators or vehicles and the cost of power outages is likely to justify a
premium compared to the residential sector. Management notes that up to 10% may be achievable
in these sectors compared with 4-5% in the residential sector, but this analysis takes a more
prudent view. Since the back-up power segment, which includes data centre back-up power, is so
large, we model a much smaller penetration rate in this segment. We note that our calculation for
range extenders only includes trucks, although the technology is also potentially applicable to other
vehicles. For the earnings calculation we apply cost of sales as 7.5% of licence revenue, 20% tax
and model a base level of operating costs at FY17e levels (£14.0m) split equally between the four
segments.
Management believes that 20% market penetration in the residential, commercial and truck range
extender markets is achievable, and 2% in the much larger back-up power market. This gives a
total royalty opportunity of c £1,200m compared with c £400m a year ago. We note that even a less
ambitious level of penetration represents a material opportunity. Since it is not possible at this stage
to determine the rate of roll-out in the four segments, we are not calculating an indicative valuation
from this analysis.
Financials: Progressing to commercialisation
Ceres follows a phased programme of engagement with potential customers. This begins with an
evaluation of the technology, during which time Ceres receives a fee from the third party for the
supply of fuel cell modules or systems and associated engineering support. Once successful, this
progresses to a joint development programme, under which Ceres receives higher levels of
payment for sharing its IP with the partner. When the partner launches a product incorporating the
technology Ceres will receive an upfront licence fee plus follow-on royalty payments based on the
Ceres Power Holdings | 15 November 2016 13
volumes sold. While not all the partnerships can be expected to go through commercialisation,
success with a relatively small number of companies would give Ceres a significant market share.
Earnings
During FY16 revenues (excluding “other operating income”, which primarily relates to grants)
almost quadrupled year-on-year from £0.3m to £1.1m, slightly ahead of our £1.0m estimate.
Revenues benefited from the release of £0.6m deferred revenue in respect of contract work
completed for British Gas as Ceres demonstrated the prototype residential system to British Gas
during H216. The remaining £0.5m revenues were from customers in Asia. Other operating income
was at similar levels to FY15 (£0.6m). Operating costs increased by 12% (£1.6m) to £14.0m,
reflecting the increased number of employees engaged in R&D and initiatives to improve the
company’s test and manufacturing capability. This rise was in line with budget. Reported operating
losses increased by £1.0m to £12.7m, which is less than our £13.2m estimate. As the tax credit
increased by £0.6m to £2.2m, reported losses after tax were only £0.4m wider than FY15 at
£10.5m.
Exhibit 6: Revisions to estimates
FY16 FY17e FY18e
Old Actual % change Old New % change New
Revenues (£m) 1.0 1.1 +10 2.0 2.2* +10 3.0**
EBITDA (£m) (11.2) (10.5) -6.3 (10.8) (10.3) -4.6 (9.5)
PBT (£m) (12.4) (11.6) -6.5 (12.0) (11.3) -5.8 (10.5)
EPS (p) (1.4) (1.2) -14 (1.1) (1.0) -9.1 (0.9)
Source: Edison Investment Research. Note: *Excluding £0.8m “other income”. **Excluding £1.0m “other income”.
Our model assumes that engagement with existing partners will intensify further during FY17 and
that discussions with potential partners will mature into evaluations and development programmes,
resulting in a strong ramp-up in revenues through the forecast period. Management continues to
aim for the target initially stated at the AGM in December 2015 of securing five global engineering
companies as customers in joint development agreements by the end of 2017, with the intention of
being in two commercial launch programmes by the end of 2018. Noting the announcements of
programmes with blue-chips British Gas, Cummins, Honda (which has signed a JDA), Nissan and
an unnamed global OEM in power generation (which has signed an MoU advising of the intention to
proceed to a JDA if the ongoing test programme is successful), we raise our FY17 revenue
estimate and reduce losses. We estimate that annual revenues from technology evaluations could
be £100-200k per partner, scaling up to £500-1,000k for a joint development agreement. At this
early stage, we exclude any potential licence and royalty fees from our financial model, giving
scope for substantial upside. We estimate that a single licence fee could be worth tens of millions of
pounds.
Cash flow and balance sheet
FY16 cash consumption totalled £11.3m (compared to £9.1m in FY15, excluding funds raised from
the issue of shares). This included £1.3m invested in the new print line and additional test
equipment. It does not include any R&D expenditure as Ceres’ policy is to expense this in the year
in which the expenditure occurs. Net cash (including short-term investments) reduced from £18.2m
at end June 2015 to £6.9m at end June 2016. Management expects the September 2016 placing,
which raised £19.4m (net), to provide funding through to the onset of commercial launches, which
management targets for end calendar 2018. It is possible that additional funding may be required at
this point to support the launch programmes.
Management notes that FY16 represents the peak of cash consumption. Our estimates show
narrowing losses, and a higher R&D related tax credit in FY17 to result in decreasing levels of cash
consumption during FY17 and FY18 (£10.8m and £9.0m, respectively) despite slightly higher levels
Ceres Power Holdings | 15 November 2016 14
of investment in test and manufacturing during FY17 and FY18 than in FY16. This leaves Ceres
with £6.6m estimated net cash at the end of FY18.
Exhibit 7: Financial summary
£000 2014 2015 2016 2017e 2018e
Year end 30 June IFRS IFRS IFRS IFRS IFRS
PROFIT & LOSS
Revenue 1,224 324 1,113 2,200 3,000
EBITDA (6,663) (9,716) (10,504) (10,302) (9,495)
Operating Profit (pre amort. of acq intangibles & SBP) (7,732) (10,642) (11,682) (11,302) (10,495)
Amortisation of acquired intangibles 0 0 0 0 0
Share-based payments (856) (1,080) (1,012) (712) (512)
Exceptionals 0 0 0 0 0
Operating Profit (8,588) (11,722) (12,694) (12,014) (11,007)
Net Interest 73 110 77 50 30
Profit Before Tax (norm) (7,659) (10,532) (11,605) (11,252) (10,465)
Profit Before Tax (FRS 3) (8,515) (11,612) (12,617) (11,964) (10,977)
Tax 1,122 1,571 2,157 2,000 1,500
Profit After Tax (norm) (6,537) (8,961) (9,448) (9,252) (8,965)
Profit After Tax (FRS 3) (7,393) (10,041) (10,460) (9,964) (9,477)
Average Number of Shares Outstanding (m) 536.8 753.2 774.0 949.5 1,007.0
EPS - normalised (p) (1.22) (1.19) (1.22) (0.97) (0.89)
EPS - normalised fully diluted (p) (1.22) (1.08) (1.11) (0.90) (0.83)
EPS - FRS 3 (p) (1.38) (1.33) (1.35) (1.05) (0.94)
Dividend per share (p) 0.00 0.00 0.00 0.00 0.00
EBITDA Margin (%) N/A N/A N/A N/A N/A
Operating Margin (before GW and except.) (%) N/A N/A N/A N/A N/A
BALANCE SHEET
Fixed Assets 1,715 2,080 2,309 2,809 3,309
Intangible Assets 0 0 0 0 0
Tangible Assets 1,715 2,080 2,309 2,809 3,309
Current Assets 10,084 20,685 10,081 19,783 10,897
Stocks 0 0 0 0 0
Debtors 2,385 2,501 3,134 4,165 4,269
Cash, cash equivalents and short-term investments 7,699 18,184 6,947 15,618 6,628
Current Liabilities (1,385) (2,013) (2,206) (2,260) (2,839)
Creditors including tax, social security and provisions (1,385) (2,013) (2,206) (2,260) (2,839)
Short term borrowings 0 0 0 0 0
Long Term Liabilities (2,341) (2,071) (897) (897) (897)
Long term borrowings 0 0 0 0 0
Other long term liabilities (2,341) (2,071) (897) (897) (897)
Net Assets 8,073 18,681 9,287 19,435 10,470
CASH FLOW
Operating Cash Flow (8,252) (9,182) (11,773) (11,279) (9,020)
Net Interest 75 110 77 50 30
Tax 1,000 1,218 1,679 2,000 1,500
Capital expenditure (520) (1,243) (1,302) (1,500) (1,500)
Capitalised product development 0 0 0 0 0
Acquisitions/disposals 0 0 0 0 0
Financing (41) 19,569 54 19,400 0
Dividends 0 0 0 0 0
Net Cash Flow (7,738) 10,472 (11,265) 8,671 (8,990)
Opening net debt/(cash) (15,437) (7,699) (18,184) (6,947) (15,618)
HP finance leases initiated 0 0 0 0 0
Other 0 13 28 0 0
Closing net debt/(cash) (7,699) (18,184) (6,947) (15,618) (6,628)
Source: Edison Investment Research, Ceres Power company accounts
Ceres Power Holdings | 15 November 2016 15
Contact details Revenue by geography
Viking House
Foundry Lane
Horsham RH13 5PX
UK
+44 (0)1403 273463
www.cerespower.com
N/A
Management team
Chairman: Alan Aubrey Chief Executive Officer: Phil Caldwell
Alan Aubrey is CEO of IP Group, non-executive chairman of AIM-listed Proactis and non-executive director of Oxford Nanopore. From 2008 to 2014, he was a non-executive director of the Department for Business, Innovation & Skills. Previously he was a partner at KPMG, where he specialised in providing advice to fast-growing technology businesses. He became chairman in December 2012.
Phil Caldwell was previously corporate development director at Intelligent Energy, where he secured OEM partners and executed licence deals and joint ventures. Before this he was responsible for business development for the Electrochemical Technology Business in ICI. He joined Ceres as CEO in September 2013.
Chief Financial Officer: Richard Preston Chief Technology Officer: Mark Selby
Richard Preston joined Ceres in 2008 as financial controller and was appointed to the board in February 2013. Previously he held a number of senior roles in business transformation and project finance at Cable & Wireless.
Mark Selby joined Ceres in 2006 and was appointed to the board in 2014. He is responsible for leading all aspects of the strategy and delivery of the Steel Cell technology development. Before joining Ceres he was part of the Control & Electronics department at Ricardo UK.
Principal shareholders (%)
IP Group 25.6
Richard Griffiths 18.0
Henderson Group 12.3
Lansdown Partners 9.8
Companies named in this report
AFC Energy (AFC:LN); Ballard Power Systems (BLDP:US); Dominovas Energy Corporation (DNRG:US); Doosan Corp (000150:KS); Electro Power Systems (EPS:FP); FuelCell Energy (FCEL:US); Heliocentris (H2FA:GR); Hydrogenics (HYGS:US); Hyster-Yale Materials Handling Inc. (HY:US); Intelligent Energy Holdings (IEH.L); ITM Power (ITM.L); POSCO (005490:KS); Plug Power (PLUG:US); SFC Energy (F3C:GR)
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